The Morning Update

Wednesday May 17th, 2023

Written by:
Paul Harrison

The US$ strengthens, oil prices are steady, equity while equity markets & US yields are mixed as markets remain cautious as US debt-ceiling talks continue. Anxiety increased after the US debt-talks failed to reach an agreement on Tuesday. McCarthy, speaker of the House of Representatives, told reporters the two sides remained far apart on an agreement to lift the debt ceiling. President Biden departs to Asia for the G7 summit in Japan today, he has cut his trip short to return to the US to resume debt ceiling negotiations with hopes of raising the US spending limit currently set at $31.4 trillion. The combination of weaker China data, ongoing US debt ceiling concerns and global high inflation continues to impact commodity prices and supports a stronger US$ which is sitting at 5-week highs. In focus today US Building Permits, US Housing Starts, & ECB De Guindos may help provide intraday direction to currency markets.

In other news. Eurozone inflation accelerated in April to 7% as rising services & energy costs offset a slowdown in food price growth. UBS flags $17 billion hit from Credit Suisse takeover. The last ship leaves Ukraine as the fate of Black sea grain deal in Russia's hands. German company Siemens raises full year outlook after 2nd quarter sales beat expectations. Ageing populations 'already hitting' governments' credit ratings-FT. Australia gears up for 'defining decade' with rate budget surplus -FT. World likely to warm beyond key 1.5C limit by 2027-BBC.

In currency markets. The US$ index extends gains, hitting 5-week highs as risk-off sentiment increases. CNY breaches 7.00 vs US$ for the first time in 5-months as China's recovery continues to wain. Turkish Lira holds at its all time historic lows vs US$ as political uncertainty continues. ZAR continues under pressure sitting just below its historical all time lows vs US$ as domestic power outages continue to deter investor activity. CNY falls 0.25%, while Asian currencies are down 0.2% on average vs US$. Trading currencies are mixed with ZAR & SEK tumble 0.9%, NOK falls 0.7%, JPY weakens 0.45%, CHF & MXN are down 0.35%, AUD slips 0.1%, while NZD firms 0.3% vs US$.

Oil prices stall on China growth concerns and increasing US stockpiles. C$ weakens as commodity prices remain under pressure and the US$ firms to 5-week highs. Tuesday saw Canadian inflation edges higher to 4.4% y/y making its first increase in 10 months, but markets do not expect the BoC to change its pause-policy. In the short term investors remain focused on US debt ceiling talks, with the uncertainty supporting the safe-haven US$ and keeping pressure on the loonie. Intraday mid-tier economic data releases from the US and low-tier CAD Canadian Portfolio Investment in Foreign Securities & Foreign Portfolio Investments in Canadian Securities may impact markets if they are outside expectations.

EURCAD weakens in early trading, down 2% in May as risk-off sentiment continues to have a greater impact on the Euro vs C$.

EUR extends loses, tumbling from 1.09 towards 1.08 since Tuesday as the US$ strengthens. Euro continues under selling pressure as risk-off sentiment persists after the US failed to reach an agreement on debt-ceiling talks. Domestically Eurozone inflation remains stubbornly high at 7% y/y as service and energy costs continue to rise. Markets will focus on ECB VP Luis De Guindos speech today where is expected to maintain his hawkish tone and is likely to hint towards two more rate hikes into Q3/23. Uncertainty over the US debt ceiling talks continue to support the safe-haven US$ and we anticipate the Euro could retest 1.0750 in coming days as Washington continues negotiations behind closed doors.

GBPEUR holds steady in early trading as risk-off sentiment impacts the currency pair equally.

GBP weakens towards 1.2400 amid safe-haven US$ buying. The resurgence of US$ demand as investors weigh the latest developments surrounding the US debt ceiling talks ahead of US mid-tier economic releases. Domestically UK Finance Minister Hunt said that they fully supported the Bank of England's policy decision and that there is nothing that can bring inflation down automatically. We anticipate the US$ will remain firm as uncertainty over the US debt ceiling continues. Intraday we anticipate the mid-tier data releases will have a limited impact on markets unless the data results are outside the expected ranges.